Why sustainable supply chains make business sense

To protect against reputational damage and the effects of climate change, do companies need to implement sustainable business practices throughout their supply chain?

 Workers at Thailand’s biggest semiconductor factory clean up after the 2011 floods; hard-drive prices soared afterwards. Photograph: DAMIR SAGOLJ/© DAMIR SAGOLJ/Reuters/Corbis

If you were looking to buy a hard drive for your computer around December 2011, you might have noticed prices had been steadily rising since October. But this was no simple case of high-street retailers cashing in on the Christmas rush: the cause was far more complex and revealed much about the vulnerability of global supply chains. The rising prices were a direct result of devastating floods in Thailand, caused months earlier by an unusually severe monsoon season, which in turn was attributed to climate change.

Along with the tragic loss of more than 800 lives, the floods cost the country an estimated $45bn (£28bn). With two of the world's largest hard-drive manufacturers being heavily reliant on Thai suppliers, costs skyrocketed for global companies such as Hitachi, Dell and HP.

The disaster highlighted an increasingly common problem: for any company relying on a global supply chain, the risks facing suppliers on a local level can have a domino effect until damage is felt in boardrooms thousands of miles away. That could be having to raise prices, as was the case with the Thai floods, or it could be reputational damage, such as Apple experienced when it was claimed workers in a Chinese factory, which manufactured some of the company's products, were working in substandard conditions.

So in an increasingly global marketplace, how can businesses ensure their supply chains are resilient to the many risks posed by climate change and the possibilities of unethical practices in distant factories?

That question was at the centre of a roundtable discussion hosted by the Guardian and held in association with the global engineering and environment consultancy URS. For many of the contributors, one of the biggest issues facing the introduction of more resilient, sustainable supply chains is the quarterly report-dominated thinking of many boardrooms. Speaking off the record, one participant said it was important for business leaders to focus on the "20-year results" – not just on the quarterly results. In other words, long-term resilience is often overlooked due to understandable pressure to focus on short-term profits. However, if sustainability were viewed through the lens of risk to business continuity, the case for a longer-term approach would be easier to make.

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The debate also heard how The UN Global Compact-Accenture CEO Study on Sustainability shows the percentage of CEOs who reported that sustainability would be "very important" to the future success of their business had fallen to 45% in 2013 – it was 54% in 2010. So how can the business case for social, environmental and governance issues be championed?

Common sense

For Simon Pringle, head of sustainability and cleantech at the accountancy group BDO, the solution starts with ensuring sustainability is understood in the boardroom. Pringle told the roundtable about a discussion he'd had with a business leader who disagreed that "making the business more efficient, spending less money on resources and wasting less" were necessarily "sustainable" issues. To the business leader, they were simply "common sense".

Pringle therefore stressed the need to make the language of sustainability relevant to the boardroom by placing it in context. "If businesses are talking about sustainability being in some way separate from the 'day job' … we won't make the same level of progress as if those roles dissolve into the fabric of the business and it becomes part of people's day jobs."

Other delegates agreed that making the business case for introducing sustainable practices across companies and their supply chains was key. Jonathan Maxwell, CEO of Sustainable Development Capital Limited, pointed out that "this isn't about trying to sell morality into the boardroom, it's about providing the ability for businesses to make better decisions to reduce costs, improve productivity, support growth and take longer-term decisions". Introducing a more sustainable way of doing business "stands a good chance in the boardroom", he added, by focusing on the "resource-efficiency agenda".

While the roundtable agreed that focusing on resources would highlight potential financial gains and liabilities, the challenge was finding ways to quantify them on a macro level. In particular, it was felt that identifying the benefits provided by the natural environment, such as fuel, water, climate and land was particularly difficult for companies. Robert Spencer, sustainability business line director at URS, said these "eco-system services" are not correctly valued by most businesses. "Once you have a system to value [eco-system services], then the business case for embedding sustainability will be easier."

Spencer pointed to the work of Puma, which developed an environmental profit and loss approach that tried to work out the true cost of the company's water use, greenhouse gas emissions, land use, air pollution and waste. The 2011 report showed the cost of these services to Puma was about €145m (£125m). If companies knew the true value of these eco-system services they could make better-informed decisions about how to manage their environmental risks, the roundtable heard. "You can't change anything until you've first measured it," Spencer added.

Alongside identifying the cost of these externalities, Richard Waterer, head of Marsh Risk Consulting, said companies needed to reduce the risk of reputational damage emanating from the supply chain. "There is more than one way to create profit," he said. "You can create it long term by reducing volatility in your business by saying, 'we will not walk consciously into a relationship or a contract where we know we are taking on risks that prove to be damaging to our reputation'."

So how can companies reduce volatility and introduce sustainable business practices across supply chains? Pringle suggested larger companies could "create a new competitive landscape" by moving from "requesting" certain standards from suppliers to "requiring" guidelines to be met. He added that a very positive change could result from saying to suppliers, "we've just made a promise and now you're all going to have to go and keep that promise".

However, some participants thought the idea of asking companies to enforce standards across their supply chains was unrealistic at present. Companies need to source competitively priced materials, the roundtable heard, and enforcing standards would result in suppliers raising their prices. Maxwell summarised the current state of the sector: "This is crawl, walk, run and we're at crawl on supply-chain management, which is 'we will talk and engage with suppliers, but we're not going to mandate anything because we can't afford to yet'."

Maxwell was referring in particular to time he'd spent "on the ground" in factories in China, working for big corporates on their supply chains. The fast-moving consumer goods sector, he said, likes the sustainability agenda but, at the end of the day, they will say "my suppliers are my biggest asset". Managing suppliers is the critical element, he added. "The guys in the factory in China have no interest whatsoever in moral sustainability outcomes," he said, unless the customer was prepared to pay a really good margin.

This view was not reflective of all industries, said Graham Dickson of npower, who pointed out that many businesses were asking suppliers to adhere to certain standards as part of their contracts. Other contributors thought that if enough businesses collaborated and all asked their suppliers to take sustainability seriously, those factories would have to change their business models to keep their customers happy.

Government legislation was therefore suggested by many participants as a way to move the agenda forward and encourage collaboration. Spencer suggested the Landfill Tax offered a good example in the UK economy of how a tax could transform industry. The Landfill Tax was introduced in 1996 and charges companies and councils for every tonne of material sent to landfill. By making the disposal of waste in landfills more expensive, the government hoped to encourage the development of innovative recycling infrastructure. "That is a great example of the right regulation causing collaboration in the supply chain, having a financial incentive, but not having the government writing the blueprint saying 'this is how you have to do it', but instead taking a step back and letting industry take that over," he said.

Global carbon tax?

Michael Stein, the founder of Trillion Fund, specialising in clean energy, agreed that legislation could be used to create a "level playing field" that would also introduce a profit motive for making businesses more sustainable. He suggested the best way of doing this would be to introduce a global carbon tax, which would be in "all our interests", pointing to data which shows global warming is a very real existential threat to future generations and therefore the long-term survival of businesses.

There was a feeling among some other delegates that while such a tax would certainly be a driver for change, it was perhaps slightly quixotic to expect such legislation to be implemented on a global scale. Stein disagreed, stressing the need for CEOs to lobby governments as it was in their "enlightened self-interest" to do so. "Unless we get real, unless we go and get our leaders to wake up and get strong and passionate about this, we're not going to get anywhere," he said.

The discussion closed with delegates summarising their thoughts. Legislation and collaboration across supply chains and among competitors were suggested by many as ways of creating a level playing field so all businesses could be confident of operating in the same commercial environment, which would encourage behavioural change all the way through the supply chain.

However, the overriding feeling among participants was that the business case for sustainability-focused companies and supply chains was so clear, it had to be a priority in boardrooms. The $45bn cost of the flooding in Thailand and the subsequent rise in the price of hard drives demonstrates the need to take climate change – and the effect it will have on business – seriously. "Let's think about what is good for business and good for countries and make decisions on the back of that," said Maxwell. "If it's not commercial, it's not sustainable," he added, highlighting just how interchangeable those words have become.

In focus

• Companies are becoming increasingly exposed to risks across their supply chains, either by disruption resulting from climate change or reputational damage.

• Building resilience into supply chains is necessary to ensure a company's long-term survival.

• There is a strong business case for developing sustainable ways of working throughout a company and its supply chain: saving resources is a more efficient and profitable way of doing business.